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IF u have enough income to hit the max, a SEP is simpler than a solo K. No plan doc, no worries about 5500 when assets exceed $250K, no worries about pain in the ass to terminate later, and you can exclude employees for up to 3 years versus 1 in 401k.
Ok - soooo... Why I posted the piece above to help educate people on the difference between a SEP and Solo plan. The limits you’re all dancing around for a 401k plan are called the 402(g) limit ($18,500 for employee contribution) and the 415 limit (up to $55k within a 401(k) plan between the 402(g) limit, employer matching and employer profit sharing.) Catch-up contributions for an individual over 50, would be in addition to the 415 limit (is this outline in the IRC code 414(v))
Research these on the IRS website...
I think you need to review the difference for yourself - not sure you have your facts right (not a knock, just stating a fact based on your comments above..)
https://investorjunkie.com/13066/sep-ira-solo-401k/
SEP is great for self employed who don’t have W2 employees. If they have a lot of employees they may look at 401k. SEP is much less administration and cost vs. a 401k plan.
For someone self employed. What would you use instead?!
FWS, Individual 401k allows the same cap as SEP but easier to get to. Nice try at an insult, but you need to know facts first. Click the link FA3 shared and learn something.
Ahem... once again, don’t forget about the fact that a Solo 401k offers a Roth option while a SEP does not. This can be a big advantage for some people
I've never seen a solo k that wasn't a safe harbor, and costs have never been anything but my AUM fee. When a plan hits $250k I have a CPA that does the 5500 for $500, which is a small price to pay for the added tax savings. We are not trying to tilt anything, we are stating the rules.
I don't know where you are doing your solo k, but I use TD. Here is how it looked for my 300k net realtor in 2017:
S-corp saved her a touch over $25,000 In taxes.
18,000 + 6000 deducted saved her another $6k.
3% match + 25% profit share saved her about another grand.
She paid $0 annual fee, $0 administrative fee, $0 TPA fee, my 96 bps AUM fee, and $500 for the 5500.
If she was a solo prop with a SEP she could still have maxed it, but she would have paid a ton more in taxes.
The SEP is easier, but is easier always better?
Agreed, though most of my solo k folks are looking for the tax savings now, I work with their tax pro to determine the best path. Bring the solo k to a meeting with a tax person/CPA and watch them light up. I have 4 tax people who send me referrals now as a result of showing this vs the SEP the other advisor had the client in.
Individual 401k. None of the administrative fees of a full 401, 18500 employee contribution, 3% match, plus the same rules as SEP for employer contributions as a profit share. Same total cap, but it only takes about $140k net income to max vs $200-250k income for a SEP.
Alright alright. You’re both right.
For Simplicity...the SEP wins. No doubt. Easier reporting and low (or no) annual fee
For Increased contributions between some particular income levels...the SoloK can be more attractive.
For most of my clients, we consult with their CPA and let them decide. No need to make this an argument.
Primerica 1, Roth solo k makes me lean towards solo k for every eligible person. Business owners often have enough creative accounting to accommodate the few grand in taxes and the net benefits are huge. And we can't forget that EMPLOYER contributions are still traditional.
My clients pay the tax using after tax dollars so that the full amount goes into the roth
Just makes more sence.
401k also allows for loans. SEP does not.
Good looking out OP. I have always appreciated SEPs for the large limit, but I didn't even consider solo 401k. The only thing I can think of is someone who may have employees in the future but not right now and doesn't want to go through switching.
But solo 401k has a Roth option which makes it super attractive. I agree with OP
I like what WMA said. IF someone was able to max every year the SEP would be nice to not have the cap where suddenly you need a report anyway. If they are an S- corp and making that much the tax advantage of the solo k would make the reporting worth it though.
Because I want to put away more than $18,500 that an individual 401k allows. Either you aren’t saving enough or you are not making enough to know the difference
OP you need to educate yourself. The limit for a solo 401k is the same as a regular 401k. In 2018 that 18,500. Yes total contribution is $55k. I can do all that with my SEP. what are you going to do to get there above the $18500 limit. Too much income for traditional or Roth IRA. And that’s only $5500. Please explain how you get to the $55k limit with a solo 401k. I’d love to hear this